MASTERCLASS: Running the right bonus scheme

A bonus scheme is a great way to incentivise your staff and keep sales and service standards high, but how can you ensure you’re running it in the right way? Katee Dias, senior associate in the employment team at Goodman Derrick explains the best solutions in offering employee performance-based benefits and common pitfalls to avoid.

Employee retention can be a tricky issue in the
hospitality sector as many individuals see the type of work as a bit of a
stop-gap, rather than an occupation for life. Bonuses are one method that
employers might use to help incentivise employees to stay on and progress their
career.

Types of scheme

Story continues below

Advertisement

Bonus schemes come in all sorts of shapes and sizes. If a
hotel owner is contemplating introducing such a scheme, there are a number of
factors to think about, for example:

Will
the bonus scheme be contractual or non-contractual? If contractual, the scheme
is more difficult to change in the future.

Does
the employer retain discretion over the terms and/or the amount to be paid? If
so, is that absolute or just partial discretion?

Will
the bonus be conditional, for example on individual and/or company performance?

What
is the main purpose of the scheme? To reward past performance or provide a
future incentive?

How
much will the bonus be? Think about setting maximum/minimum limits or outlining
a method of calculation.

Consider
the practicalities. When will it be paid? Will it be pro-rated for those in
their first year of employment?

Will
there be a payment on termination? Sometimes a bonus is forfeited entirely and
other times it might be pro-rated. Some employers even introduce good/bad
leaver provisions so that it depends on the individual’s particular
circumstances (for example, the employee still receives a bonus if they are
made redundant but not if they are dismissed for gross misconduct).

Potential Traps

Running a bonus scheme can present some tricky issues and
potential traps for employers, giving rise to disputes with employees and
possibly even Employment Tribunal or Court claims being brought against them.
Some areas to watch out for include:

Implied right to a
bonus

If a bonus scheme is in place for some time and the
employer habitually runs it in the same manner or the same amount is always
paid out to the individual, that custom and practice can give rise to an
implied right to the bonus (even if the scheme is described as being
non-contractual). It can be helpful to employers if they add a provision making
it clear that just because a bonus is awarded in one year, it should not give
rise to any expectation of another bonus being awarded in future years.

Exercising
discretion

Where a bonus scheme grants the employer discretion, it
does not mean that the employer has free reign to do exactly as they wish.
Discretion must be exercised rationally and in good faith. It should certainly
not be used in a way which destroys the trust and confidence that exists
between the employer and employee.

Subjectivity

Where a
scheme is conditional on certain targets being met, try and adopt objective,
measurable criteria as this is less likely to be open to challenge compared to
subjective benchmarks. Therefore, instead of, say, assessing an individual’s
work quality (which is difficult to measure and therefore likely to be a
subjective assessment), consider whether you can focus on more objective
measures such as their punctuality (assuming you have a reliable clocking in
system) and positive and negative guest feedback received about them, perhaps
even conducting a mystery diner assessment.

Discrimination

Care should be taken not to discriminate against
individuals when operating a bonus scheme. For example, part-time and
fixed-term employees should not be overlooked for bonuses. Using attendance
records as a factor in bonus calculations could discriminate against someone
with a disability or who has taken pregnancy-related sick leave. Further, it
can be unlawful if an employee who is on maternity leave is not given a bonus.

Also, basing a bonus on the individual’s length of
service potentially discriminates on the grounds of age against younger
workers. That said, there is an exemption in the age discrimination legislation
that allows employers to base rewards on 5 years’ service or less (for example,
a bonus scheme whereby the employee gets specified amounts on each work
anniversary up to and including their 5th anniversary).

If a bonus scheme incorporates a service-related element
over 5 years’ service, in order to be lawful, the employer will need to show
that the bonus scheme fulfils a business need. By way of example, an employer
might say that such a scheme encourages loyalty. However, employers should be
prepared to evidence this in case it is challenged. One way to obtain such
evidence might be to undertake a staff survey to check that such a scheme
really would encourage employees to stay.

Repayment

An employer may seek to make a bonus repayable if, for
example, the employee leaves their employment before a specified date. However,
employers must draft such clawback provisions very carefully as they could be
challenged as a penalty or a restraint of trade (in other words, an
unreasonable restriction on the employee from leaving their employment and
moving on). If such a challenge was successful, the repayment provision might
fail. It might be better, for example, to structure the bonus so an interim
bonus is awarded or spread the payments out in instalments.

Bonus related
claims

Failing to pay a bonus can give rise to breach of
contract and/or unlawful deduction from wages claims. Also, unless handled with
care, the manner in which the scheme operates may potentially lead to
discrimination claims or allegations that there has been a breach of the
implied duty of trust and confidence, therefore giving rise to a constructive
dismissal claim. Litigation is a time-consuming and expensive process and, if
the claim is successful, can lead to significant amounts of compensation being
awarded to the employee.

An employer will therefore want to ensure that the rules
of their bonus scheme are clearly drafted and fairly implemented to ensure that
the scope for dispute is minimised. If done properly, a bonus scheme can be a
great mechanism for improving employee retention and satisfaction.

About the author

Katee Dias is a senior associate in the employment team at
Goodman Derrick, the London law firm.

Twitter Tweets

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Cookie settingsACCEPT

Privacy & Cookies Policy

Privacy Overview

This website uses cookies to improve your experience while you navigate through the website. Out of these cookies, the cookies that are categorized as necessary are stored on your browser as they are as essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may have an effect on your browsing experience.

This website uses cookies to improve your experience while you navigate through the website. Out of these cookies, the cookies that are categorized as necessary are stored on your browser as they are as essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may have an effect on your browsing experience.

Necessary cookies are absolutely essential for the website to function properly. This category only includes cookies that ensures basic functionalities and security features of the website. These cookies do not store any personal information.

Any cookies that may not be particularly necessary for the website to function and is used specifically to collect user personal data via analytics, ads, other embedded contents are termed as non-necessary cookies. It is mandatory to procure user consent prior to running these cookies on your website.